Raleigh-Durham, North Carolina, overcame many obstacles last year. After a dismal reaction to the recession, the office market is starting to improve with decreasing vacancy rates and positive net absorption. The industrial sector, though relatively small, continues to be attractive to businesses looking to locate in the area. Retail activity is high, with new developments underway and new retailers opening locations.

Office

Eighteen months after what economists later determined was the end of the recession, the Raleigh-Durham MSA’s office market was ranked as the worst in America by Moody’s Investors Services. Experienced real estate professionals, who weathered the stagflation of the late 1970s and the recession during the early 1990s, proclaimed the market to be the worst they can remember.

Six months later, optimism is on the rise as true vacancy rates declined from approximately 23 percent in the first quarter 2003 to approximately 20 percent after the third quarter. Net absorption has been positive throughout 2003 and has outpaced the delivery of 350,000 square feet of new construction. While job growth remains anemic, mass layoffs have subsided and the unemployment rate decreased from 5 percent in January 2003 to 4.2 percent in September 2003 as reported by the Bureau of Labor Statistics.

Now that the market appears to be on a slow road to recovery, the conditions, which created one of the worst markets in the nation, may influence future real estate decisions. During the late 1990s, the Raleigh-Durham area was a hotbed for dot-com companies, which generated no profit but enjoyed large amounts of venture capital. Landlords were quick to lease space to highly speculative tenants. Many start-ups, dot-coms and even established companies soon found themselves subleasing space a mere 2 years into their leases, or in extreme cases, failing to even occupy their newly leased space. During 2002, available sublet space exceeded 2 million square feet, and true vacancy rates reached 25 to 30 percent in some submarkets. As the market improves, landlords are requiring more stringent demands for securitization of new leases.

New construction was a contributing factor in the decline of the Raleigh-Durham office market. During 2001, more than 3 million square feet of office space was delivered into a softening market, with much of the space between 25 and 40 percent pre-leased. Some Class A office buildings stood vacant for more than 1 year before landing their first tenant. For at least the near-term, many lenders are requiring at least 50 percent pre-leasing before the commencement of a project.

The office market is expected to remain relatively stable through the first half of the year, with slight fluctuations as sublease space expires and becomes available on a prime basis, together with the few new deliveries. By late this year, the market is expected to be in the midst of a more substantial movement toward recovery. Despite having a down economy, the Raleigh-Durham area ranked third in Forbes Magazine’s 2003 Best Places for Businesses and Careers, and North Carolina ranked first in Site Selection’s 2003 State Business Climate Rankings. The excessive amount of high quality available real estate and a healthy supply of unemployed white-collar workers in the Raleigh-Durham area could provide an attractive environment for growing companies. However, considerable caution is still suggested for near term absorption of space and proposed developments.

— Neal Friedman is managing director and Caroline Miller is research director with Advantis Real Estate Services Company, North Carolina region.

Industrial

The Raleigh-Durham industrial sector is a market in transition. With just 33.6 million square feet of flex and warehouse space, it is a relatively small market, but its size has increased by approximately 73 percent since 1995, primarily as a result of the tech boom in the late 1990s. Unlike other North Carolina markets, Raleigh-Durham lacks a traditional manufacturing and distribution base. Warehouse space historically has been filled by high-tech firms and the third-party logistics companies that support them. That demand evaporated with the economic downturn, pushing vacancy to nearly 24 percent. Research Triangle Park (RTP) contains the greatest concentration of Raleigh-Durham’s high-tech firms and has borne the brunt of the tenant exodus. Since the beginning of 2003, RTP has witnessed negative absorption of 799,000 square feet, accounting for all but 128,000 square feet of Raleigh-Durham’s new vacancy. In response to persistent weak leasing conditions, landlords have become aggressive with concessions, pushing effective rents for some larger users as low as $2.50 to $3 per square foot.

Nonetheless, the long-term outlook for Raleigh-Durham is positive. Speculative construction has slowed significantly. Just 202,000 square feet is underway, most of which will be delivered in eastern Wake County, where land prices and vacancies are significantly lower than those in RTP. This lack of new space coming on line should aid in bringing vacancies down by the second half of 2004. Additionally, activity from smaller users has picked up, and there are early signs of a recovery in the tech sector. The biotech and pharmaceutical industries also hold great promise for the Raleigh-Durham market. Companies such as KBI Pharma and Diosynth have already announced expansion plans that could ultimately result in hundreds of new jobs for the region.

Raleigh-Durham will remain an attractive business location over the long term thanks to its central East Coast location, a world-renowned research and technical park, three top-notch research universities and an exceptionally skilled workforce. Current perceived weaknesses in the market such as abundant available space and discounted lease rates may add to the region’s appeal for new and expanding industries.

— Elizabeth Raiford is director of marketing and research with Grubb & Ellis|Thomas Linderman.

Retail

Approximately 2 million square feet of retail space has opened in the Triangle this year. Wal-Mart opened its first Supercenter in Raleigh at the new Alexander Place Promenade on Glenwood Avenue north of Interstate 540. Kohl’s will also open this spring at the center, which was built by Faison. At least two more supercenter stores are planned for southern Wake County, one possibly at the intersection of U.S. 70 and Tryon Road and another near U.S. 1 and Williams Street in Apex.

Just around the corner from Alexander Place is Brier Creek, a development located between U.S. 70 and Interstate 40, adjacent to the I-540 outer loop. All but 500 of the 1,900 acres of land that comprise Brier Creek have been sold for development. The project includes the 800,000-square-foot Brier Creek Commons shopping center, a 30,000-square-foot Dick’s Sporting Goods and an 85,000-square-foot grocery-anchored center to be called BrierDale. AAC Real Estate Services, developer of Brier Creek, is seeking an upscale, gourmet grocer to anchor BrierDale.

In October, Target Corporation opened a SuperTarget at Poyner Place shopping center. The 175,000-square-foot store is located near Triangle Town Center off Capital Boulevard and Old Wake Forest Road. Target is also building a SuperTarget at Beaver Creek Commons shopping center on the west side of Apex. Lowe’s Home Improvement Warehouse is expected to join Target at Beaver Creek Commons. Apex is hot right now due to its location at a future interchange of I-540, dense residential construction on both sides of U.S. 64 and average household incomes that exceed $100,000. Shopping center developers hope to lure shoppers to Apex from Cary and Holly Springs.

Target is also scheduled to open at the former North Hills Mall, which is being redeveloped by Kane Realty, in October. The $200 million mixed-use project at Six Forks and Lassiter Mills roads includes a 14-screen movie theater, the original JC Penney and underground parking. Over the next few years, plans call for a dozen restaurants, a 200-room upscale hotel, two office towers, a 300-unit apartment building and an eight-story condominium building. Pulse Athletic Club, a 50,000-square-foot gym owned by John Kane, will be part of the project.

Developers are being creative when looking for sites inside the beltline. Zimmer Development has secured the 15-acre former Pepsi plant on Wake Forest and Six Forks roads and is attempting to turn the 30-year-old bottling plant into one of the largest shopping centers inside the Beltline. This is one of the sites developers are interested in for retailers such as Target, Wal-Mart or The Home Depot. Less than a block away, the 23-acre former Alcatel plant sold to a Chapel Hill, North Carolina, investor for $4.25 million. In addition, a 56-acre site at Capital Boulevard and the Beltline is under contract to Faison and Developers Diversified.

A plan is being created for a renaissance project for downtown Raleigh. City council members are considering reopening the Fayetteville Street pedestrian mall to allow vehicle access. The reconfiguration is being discussed in order to revive ground-floor retail and restaurant activity. The city’s timeline calls for construction to begin in March with completion in December. Several new top-quality downtown office and condominium developments are planned that include street-level retail shops.

Wakefield Associates and Kimco Developers recently completed Wakefield Crossings, an 86,000-square-foot Food Lion-anchored shopping center located at the intersection of Wakefield Pines and New Falls of Neuse Road. Food Lion has invested $60 million to improve 68 of its 71 stores in the Triangle. The supermarket chain hopes to gain new customers seeking fresh foods and more choice, yet not alienate their middle-class shoppers who desire low prices.

Food Lion has a 31.8 percent market share in Raleigh, followed by Harris Teeter (19.2 percent), Kroger (14.5 percent), Lowes Foods (12 percent), Winn-Dixie (6.2 percent) and Wal-Mart Supercenter (5.8 percent). In May, Winn-Dixie opened a new store at Brier Creek, but the chain has closed four Triangle stores since 2000.

New rooftops will soon be springing up in southeast Raleigh. Fifty-three acres on the southwest side of Pearl Road have been rezoned for approximately 210 homes, which will complement several other new subdivisions. Another 2,400 homes are proposed for 600 acres at Rock Quarry and New Hope roads. Pearl Road is expected to become a major north-south connector, which means available land is now more valuable.

Sports Authority is closing its only Raleigh store after facing stiff competition from Dick’s Sporting Goods. The 45,000-square-foot store on Glenwood Avenue, formerly a Jumbo Sports location, will close in February. Sports Authority, the world’s largest sporting goods retailer, merged with Gart Sports in August and is closing its weaker and duplicate stores in some markets.

Recent transactions in Raleigh include the sale of Capital Crossing, a neighborhood center anchored by a 72,000-square-foot Lowes Foods and an adjacent 20,200-square-foot Staples. Inland Retail purchased the center in separate transactions from Faison-Food Stores LLC and Capital Crossing LP. The center traded for $9.9 million in early 2003.

— Lynn Leonard is vice president of marketing with NewBridge Retail Advisors.

COOPER CARRY FOCUSES ON RALEIGH’S REDEVELOPMENT Two Progress Plaza Like many metropolitan areas, Raleigh is a city that has grown toward its suburbs, leaving downtown real estate in recession, yet open for new development possibilities. Developers, aware of the large corps of city and state government workers in the area, have targeted downtown Raleigh for mixed-use plans that call for retail and residential space in addition to office space to reverse the current status of Raleigh’s downtown as a nine-to-five city. Atlanta-based Cooper Carry is working with Raleigh on three important projects that will help revitalize the city’s downtown. Developing the Vision for Raleigh’s Downtown The city of Raleigh and the Downtown Raleigh Alliance retained Cooper Carry to develop a master plan for the downtown. Cooper Carry worked side-by-side with the city of Raleigh and its citizens through a four-day workshop. Once the citizens’ goals and guiding principles were collected, a vision for the city’s heart was generated. The plan contains five main components (two policy initiatives and three physical initiatives). It seeks to improve the pedestrian environment of downtown by connecting existing and emerging neighborhoods to Fayetteville Street, investigating federal funding and connecting to the future Triangle Transit Authority (TTA) station with pedestrian linkages. The plan addresses the convention center by solving lobby access, suggesting future expansion to the south, investigating mixed-use uses and developing a strategy for active edges on Cabarrus Street. The plan proposes regulatory reform including centralizing the approval process, providing development incentives and addressing issues dealing with outdoor dining and other pedestrian encroachments. Finally, the plan addresses downtown management by suggesting the creation of a Downtown Development Corporation. Phase II of the planning process, Fayetteville Street Renaissance, is currently underway. This plan seeks to revitalize downtown by creating a centerpiece street for both the city and the state. This includes filling in the development gaps, opening available blocks to vehicular activity, re-establishing the capitol vista, developing an outdoor festival and performance space, and developing a design to encourage retail success. Progress Energy Sees Potential for Raleigh’s Downtown Key downtown tenants such as Progress Energy also have seen the potential for new space amid the changes in the downtown scene as well. Cooper Carry, the architect of record, and Progress Energy have developed a plan for Progress Energy’s new downtown headquarters that encompasses a four-block area in downtown Raleigh, with the goal of redeveloping existing space and bringing a more efficient design to downtown. The plan calls for densification through the addition of a rich mix of urban office space, street-level retail and structured parking, ultimately leading to a new, and dynamic environment for working and living. Regional Transit Center to Assist Commuters Also adding to the redevelopment of the area is the TTA Regional Transit Center, where Cooper Carry is serving as a transit architect consultant to Raleigh-based Cline Design Associates. Currently in preliminary design, this development is located in Research Triangle Park, adjacent to Triangle Metro Center mixed-use development. The Transit Center will allow for coordinated transfer activities among regional bus routes, shuttles and rapid rail to serve the Triangle region including Raleigh, Cary, Morrisville, Research Triangle Park, Durham and the airport. — Krisie Augustine, Cooper Carry

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